Brazil's cotton challenge a marathon

This is a marathon — not a sprint, says Bill Gillon of Brazil's World Trade Organization challenge of the U.S. cotton program.

“We're not done by a long shot,” the legal counsel for the National Cotton Council told members of the Mississippi Agricultural Economics Association at their annual meeting at Mississippi State University.

Although press reports have indicated that the WTO panel decided against the United States, Gillon says the ruling, which was delivered June 18, is confidential and won't actually be public until it's translated and handed out to all member governments.

“At that point, the U.S. has 60 days to appeal it, and it'll take about 90 days to complete the appeal, so we're looking at sometime around November before the case is finally decided.”

Until then, Gillon says, everyone is speculating on the decision, based on submissions to the panel and on press reports that the ruling went against the United States.

“Whether what the press has reported is right or wrong remains to be seen. They've only given us the fundamental outline of what the decision was.”

If the ruling is, in fact, against the United States, and if the United States should lose its appeal, Gillon says the United States “would be given a reasonable amount of time to comply.”

What impact would an adverse ruling have on the farm bill?

“It's hard to speculate,” Gillon says. “It would depend a lot on what the analysis was and what policy options were left. There more than likely would be changes — but there are always changes in farm bills.

“When the United States went into this process of multi-lateral negotiations on agriculture, it was committed to change. The question is, will it be change dictated to the United States by a three-member panel, or will it be change that comes out of negotiations in which the United States has input and some control?”

Some 38 documents, of more than 1,000 pages each, were filed in support of the U.S. position, he says, and that's just a fraction of the total.

Official U.S. responses were all “very supportive” of the U.S. cotton program and industry, Gillon says. “The statement by Sen. Thad Cochran, R-Miss., was particularly good, and there was a very strong statement out of the White House.”

The challenge by Brazil covers all aspects of the U.S. cotton program, the 1996 and 2002 farm bills, the Step 2 program, the market loan, direct payments, counter-cyclical payments, disaster bills, the federal crop insurance program, and the export credit guarantee (GSM) program.

Gillon says the challenge boils down to a question of whether U.S. subsidies cause “serious prejudice” against the interests of Brazil. The two key components of serious prejudice in their complaint was that the U.S. program caused significant price depression in the same market and an increase in U.S. world market share for cotton.

According to the media, he says, the panel's ruling against the United States was based on a WTO provision that payments to farmers should not be based on price or production, but on the market. Brazil alleged that U.S. cotton support levels in 1998 and 2002 exceeded the level of the 1992 marketing year.

“Their argument was that payments under the FAIR act of 1996 and direct payments under the 2002 legislation were both based on production and price.”

If the press reports are factual, Gillon says, “This ruling could have broad implications across all U.S. feed grains, cotton, and rice — all commodities that receive some type of support.”

The analysis offered by Brazil, Gillon says, cited studies showing price impacts in the presence of the U.S. cotton program. “Within the course of these thousands and thousands of pages of documents, the price impact submitted by their economists ranged from 2 percent to 26 percent.”

Another argument by Brazil was that U.S. production zoomed from below 15 million bales to almost 20 million bales over four years, with prices diving dramatically, particularly in the 2000-01 period, and U.S. cotton exports rising.

Gillon says Gary Adams, vice president for economics and policy analysis at the National Cotton Council, pointed to flaws in the Brazilian analysis.

“For one thing, the period 1998-2001 is the most unfair comparison you could ever draw for U.S. cotton over the last 30 to 45 years. 1998 was the lowest production year for cotton, except the PIK year of 1983. 2001 was a very high production year, one of the two years since the 1860s that approached 20 million bales. So, within that four-year period, you have two of the absolutely worst points of comparison.”

And, Gillon says, “If you looked at 1998 and 2001, you wouldn't find much disparity in what was planted, but you'd find a huge disparity in what was abandoned in 1998 because of weather. You'd also find some disparity in the yield for 2001, which was particularly good because of fairly low abandonment.

“It also ignores the fact that in 2001 there simply weren't any other good planting options — no price analysis that said plant this or that crop instead of cotton. And it ignored that U.S. acreage response during the period was similar to that of the rest of the world.”

Too, he says, the Brazilian analysis “fails to explain the real reason for the increase in U.S. exports: that U.S. consumption of cotton by domestic spinning mills from 1999 to 2002 dropped from 11 million bales annually to below 6 million bales annually.

“So, the option is, you either reduce your production by that amount, or you start shipping more overseas. The United States has gone from a one-third exporter to almost a two-thirds exporter as a result of losing that big piece of its domestic market.”

Thus, Gillon says, production by U.S. farmers isn't the relevant question; “rather, it's what did they plant, why did they plant it, and what caused them to plant it? Brazil's analysis didn't show this.”

As to the allegations of price suppression, he says there was instead “price depression — particularly when we hit 2000, and by February 2001, there was a fall-off-the-cliff drop in price, and it continued down into 2002.”

During that period, however, Gillon says U.S. cotton prices were “almost constantly above” the A-Index, widely referred to as the world market price, “and it was almost always above the Brazilian price. So, we don't see any pattern of the United States undercutting world prices or having any impact on prices.”